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demand-GDP
inventory investment
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assumption in short run
- price is fixed
- ie. firms are willing to supply any amount of goods
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Consumption is a function of...
disposable income
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Why are G&T exogenous?
Governments do not behave with the same regularity as consumers or firms.
Macroeconomists must think about the implications of alternative spending and tax decisions of the government.
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Difference btw GDP and total demand for goods
Inventory investment; because it is not consumed it is not part of the demand
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*Components in GDP, eg. C and IM may offset each other and result in no net change in GDP
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Autonomous spending is positive when...negative when...
- Government is running a balanced budget or having budget deficit;
- very large budget surplus
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Formula of Z
Z=(autonomous spending)+c1Y
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*Any change in autonomous spending will change output by more than one for one
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The multiplier effect/amplification effect comes from
- demand Z↑
- production Y↑
- income↑
- consumption↑
- hence Y↑>initial shift in demand
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Y=income/production;
Z=...
- Demand
- expenditure
- spending
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Interpreting the multiplier
The sum of all successive increase in production
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How Long Does It Take for Output to Adjust?
assume production responds to demand instantaneously!
assume consumption responds to changes in disposable income instantaneously.
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Deriving IS relationships
- no govt
- Y=Z
- Y=C+Saving
- Z=C+I
- I=Saving
- verify I=saving
- with govt
- Y=C+I+G
- I=Y-C-G
- private saving=Y-T-C
- public saving=T-G
- national saving=Y-C-G
- hence I=national saving
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private saving equation
S=-c0+MPS(Y-T)
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Equilibrium IS equation
I=-c0+(1-c1)(Y-T)+(T-G)(ie the public saving)
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Explain how diseqm leads to inventory investment
Originally the firm produces 100 units and it is the equilibrium output, now it decides to produce 200 units, according to Z=c1Y+autonomous spending, change in demand equals c1(0.5)*100=50, total demand=150, 50 units becomes inventory investment
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what is the paradox of saving
as people attempt to save more, the result is both a decline in output and unchanged saving IN THE SHORT RUN
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mechanism behind paradox of saving-I=S perspective
- s=-c0+MPS(disposable income)
- when consumer wants to save more, c0 ↓
- 1)-c0 ↑, s ↑
- 2)consumption ↓, Z ↓, by eqm, Y↓, S↓
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The government is not omnipotent because
- Changing government spending or taxes is not always easy .
- The responses of consumption, investment, imports, etc, are hard to assess with much certainty. Anticipations are likely to matter .
- Achieving a given level of output can come with unpleasant side effects. Budget deficits and public debt may have adverse implications in the long run.
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mechanism behind paradox of saving-Y=Z perspective
- S=Y-T-C
- Y=C+I+G(Y=Z)
- hence S=I+G-T
- consumer's decision to save more cannot affect I, G, T
- S does not change
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how to calculate GDP deflator
nominal GDP/real GDP(specific base year)
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calculate inflation rate
- Pt: GDP deflator of t
- P(t-1): GDP deflator of t-1
- inflation rate=Pt-Pt-1/Pt-1
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under what condition will chained type GDP and fixed based year GDP give different numbers
- produce more than one good
- otherwise due to the different weights of goods, the estimate is not accurate
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problems with fixed based year
- overest. growth of years after base year and underest growth of years before base year
- frequent revisions
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how to calculate real GDP for 2001 in chained dollars
- matrix: base years dollars as column; years'productions as row
- use column results: production growth rate for both years
- avg production growth rate
- 2000 index:1; 2001 index=1+avg rate
- 2001 GDP in chained=nominal GDP in 2000*2001 index
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how to calculate eqm output and demand
- Y, Yd, C, multiplier, autonomous spending
- output: mutliplier
- demand: C+I+G
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why is tax called automatic stabilizer when T=t0+t1Y
- multiplier=(1-c1+c1t1)
- autonomous spending↑, Y↑, T↑, lessen the ↑in Y
- economy responds less to changes in autonomous spending than in the case where T is independent of Y
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suppose t depends on Y, if autonomous spending ↓, why is balanced budget requirement destabilizing?
- Y↓ and T↓
- to balance budget, ↓G
- Y further ↓
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suppose I=b0+b1Y, if b0 ↑, what is the ↑ in investment?
(b0↑)+ b1*Y↑
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if investment is exogenous(given), saving is
unchanged
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